Google Manufacturers Nexus Prime In The US, Makes No Profit -- But Will Consumers Care?

There's a great deal of buzz surrounding the Google Nexus 7 tablet announced at Google I/O yesterday. At $199, the 7" tablet is a steal, given that it packs a quad-core CPU, 8GB of storage, a 1200x800 screen, and a front-facing camera. In a clear shot across Apple's bow, Google is prominently highlighting the fact that the tablet is "Designed and Manufactured in the USA" as opposed to Apple products, which are "Designed by Apple in California, Assembled in China*."

The Nexus 7 isn't entirely manufactured in the US, but most of its components are. Semiconductors and the tablet body are shipped to Asia for integration, then shipped back. This shift to bring manufacturing back to the United States has been sparked by criticism of Apple's relationship with Foxconn, rising transportation costs, rising wages in many of China's coastal cities where factories are located, and growing concerns over IP theft by Chinese companies. Google has previously stated that it isn't trying to kick off a crusade, but was interested in exploring if products could be manufactured domestically while remaining cost competitive.

Original image by The Verge

The good news is that bringing component-level manufacturing/sourcing back to the US is a far better way to stimulate job creation and wage growth than building semiconductors in Asia and simply assembling the finished product here. The bad news is that going this route has forced Google to sacrifice its profits on the actual device. The $199 version of the tablet is being sold at cost (the 16GB model, which sells for $250, presumably brings in a few dollars). That also may be way certain features, like an SDmicro slot, are missing from the Nexus 7.

When Google says it sells the tablet at cost, it isn't kidding -- the $199 price tag doesn't include the cost of distribution or advertising. Google's plan for long-term profitability is to leverage its advertising business and content offerings through expanded Google Play integration. In the meantime, Google being Google, it can easily afford to carry the tablet for a year or two while it ramps up features and content access.

With this being an election year in the United States, you can expect to see both Romney and Obama talking about the economy and their various job creation efforts. Remarkably absent from these discussions will be any acknowledgement that consumers, not presidents, decide whether or not "Made in the USA" counts for anything. Google, by all accounts, has put a genuine effort behind domestic production, even though doing so raises the unit's price and makes it more difficult to compete against companies who still outsource production to China.

Nexus 7 sales will play a part in determining whether or not more companies jump on the domestic production bandwagon. It's hard to overstate how critical economies of scale are to any long-term effort to move manufacturing back to the US. As things stand now, only a handful of companies are positioned to sell a tablet at cost while relying on media and software sales to fuel profits long term. The only way to bring US manufacturing costs down is to build new factories, which can only be justified by high demand for American-made goods.